Why the P&L Should be Your Least Favorite Financial Statement

P and L Statement

There are a couple of problems with a profit and loss statement despite they are importance to a business. One of these problems is they are an “after the fact” accessory to the running of your company. A P&L does an excellent job of giving you a historical scorecard for how well you’ve done, but at the same time you can look at the big profit numbers, open your check book and see the money just isn’t there. Cash flow does not equal profit.

Small companies especially need to focus not so much on their profitability but on the cash flow the business is experiencing. You need to make sure you have enough reserves to pay for your normal expenses like payroll and occupancy costs, but also enough to invest in inventory or equipment, pay taxes when due and repay debts. There are several steps to take to understand and manage your cash flow. First, you need to understand your basic financials, next setting up separate tracking accounts, set monthly goals, and develop a realistic budget.

Understanding Your Financials

Understanding Your Financials

Included in your financial statements should be a page titled something like Statement of Cash Flows, or Changes in Financial Position. This statement is underutilized by many business owners and accountants because it is hard to create and explain. However, it can be one of the most important financial statement in your monthly or quarterly reports.

The cash flow statement is the bridge between the cash in the bank as shown on the balance sheet, and the profit (or loss) on the P&L. Starting with the net income, it traces where cash has been spent during the period (called uses) and where cash was generated (Called sources). Looking at this statement you can see that cash was maybe spent (a use) on increasing inventory or more cash was collected on receivables that were billed for the period (a source).

Also, a close look at your existing customers will allow you to see what your projected revenues will be. By looking at each individual customer, you can all determine project priorities and if there are any lingering customer service issues that allow a client to miss a payment deadline. Letting your sales people be a part of the cash focus empowers them to help move potential clients through the sales funnel quickly and efficiently.

Separate business Accounts

Setting Up Separate Tracking Accounts

Some businesses have found it beneficial to open separate checking accounts for major
categories of spending. This is analogous to the envelope method many of our parents used to budget, with one envelope for food, another for rent or mortgage, and so on. A growing business will need four or five of these accounts: a general operating for regular expenses, taxes, owners payroll or draw, savings for expansion or equipment, and possibly one for debt repayments.

The advantage of doing this is the inherent discipline of having money earmarked for specific things. With separate accounts, you can still move money around for short term or emergency needs, but the added layer of transactions gives you the time to consider other alternatives or if the importance of the need or emergency is that great.

Set Monthly Goals

Set Monthly Goals

With the basic of you financial position in hand, you can begin to set some monthly or quarterly goals. Starting with your balance sheet start listing the major accounts (cash on hand, accounts receivables, fixed assets, payables, etc.). In a column put the current balance of those accounts. Next to that put realistic goals for what you would like that balance to be at the end of your budgeting period.

Some of the calculations can get complex, so if you are well versed in using a spreadsheet application like Excel or Google Spreadsheets, that will save you a lot of time and frustration. As an example, your accounts receivable balance is a function of your past collection history and sales. Inventory likewise is a function of your current inventory plus purchases minus sales. Don’t let things get too complicated and try to keep it as simple while maintaining a realistic perspective.

A Realistic Budget

Develop A Realistic Budget

Once your goals are in place you can begin to develop a workable budget. This plan will be your company’s marching orders for the next planning period. Sales will know what they have to sale, your A/R department will know what needs to be collected and you will know how much inventory will be needed to achieve your sales goals.

Managing your cash flow is the most important aspect of running a small business. These tips can help get you started in the right direction. If you have questions your accountant or CPA will be able to help.

From the Author:

Kudos for going over my blog. I enjoy covering business and administration ideas. I’m an entrepreneur inside, and appreciate people who wish to grow businesses and contribute to the economy.

This article was sponsored by Neches FCU, with locations in Port Neches, Nederland and Beaumont.

Neches FCU is a Texas credit union and has a courteous and attentive team of professionals ready to provide services to our members. When its doors open at any of the several service centers, the mission of “Ultimate Member Satisfaction” becomes the imperative for every employee. They are respected for a personal, dynamic and upbeat work atmosphere, providing a memorable service experience, and where members are known by name.

Neches has approximately $438 Million in assets with over 45,000 members. Neches FCU is considered by members and the business community as one of the best credit unions in Texas and an actively involved partner, helping our Family, Friends and Community!

Clients That Desperately Need Accountants using Cloud Technology

Technology advances

Technology Rules

While we are now in the grip of tax season, clients should be seeking the insight and expertise of an accountant who is more tech savvy. Cloud technology in accounting is designed to improve the bookkeeping process with programs that help the client to gain more financial insight in their daily business operations. The use of today’s technology where financial matters are concerned, can be a bit scary and challenging all at once to business owners. Some people are open to embrace any modern concept that allows for an easier tax preparation experience. Then there are others who cringe at the idea of allowing technology to sort through their personal financial information.

Do it Yourself

DYI Clients

The clients who are more likely to embrace the technological side of accounting for tax preparation will always seek out software that allows them to manage their own numbers. Unfortunately, some of this software runs on two to three-year cycles and must be upgraded to maintain their functionality in the key areas of accounting, such as payroll.

Save Time With An Accountant

Without the proper accounting background, at the year’s end the numbers just don’t add up and a great amount of time is wasted getting the numbers to make sense. This is where the expertise of a technology savvy accountant is needed to set things straight. In fact, the best time to seek the services of an accountant is at the start of the year so that he can be familiar with a client’s records. By the end of the year, the client and accountant can collaborate more effectively.

Pushing paper

Traditional Paper-Pushers

The clients that tend to salvage their invoices and receipts until tax time, place themselves at a huge disadvantage. They are not open to more conducive methods of bookkeeping, such as accounting software, much less cloud technology. For audits and tax season all the random, disorganized paperwork appears with the expectation that the accountant do the sorting. Had the documents been accessible to the accountant throughout the year, all paperwork would be in order and costs for services would be minimal.

Extra work

Extra Work, Extra Fees

Either way, these clients who take a very basic approach to keeping track of their yearly finances, are usually unhappy with the fee for services. It is more economical for them to employ the services of the accountant through the year. Paying on a monthly basis is better than having to pay a lump sum at the year’s end for services. If they weigh the two, they will find that less work is involved by keeping track as financial transactions happen.

Transitioning to Cloud Technology in Accounting

In moving to the cloud, there is an approach that works best for the DIY client. First, the accountant should make an inventory list of clients who use desktop software vs. those who use cloud. This will give the him an idea of when the desktop clients are nearing their time to update software, which is the perfect time to discuss making the switch to cloud accounting. They must be made aware of the benefits of using cloud and how it would best fit their industry and help them to make better decisions in other areas of business as well.

Cloud Technology simplified

A Cloud Demonstration

For the clients that find it best to hide their paperwork until needed, a little more explanation of cloud technology is necessary. Since they are more cost-conscious, the accountant must show them exactly how it will benefit them overall financially by making the switch to cloud accounting. A demonstration of how the cloud will allow them access to their work in real time and an estimation of the difference in fees to maintain it on a monthly basis will appeal to them the most.

The Eye-Opener

After a year of running the cloud for the client, they will be able to understand why it is the best accounting tool for them. Their real time cash flow balance and outstanding payments are shown on the cloud accounting platform. Here they will clearly see how the insight to their financial transactions is improved.

Jumping Over Hurdles

Jumping the Hurdles

Both types of clients come with certain challenges in convincing them that cloud accounting is best. The DIY client may feel that purchasing a software license is more cost-effective than investing in cloud technology. On the other hand, the traditional client may have to invest more for the technology, but will save in the long-run. The seamless bookkeeping process and the time savings will compensate for the extra investment.

Software security

Cloud Security

Cloud accounting provides excellent security of the clients’ accounting records. Great care and cost goes into the protection and maintenance of sensitive information. The business owner would be unable to maintain this level of security in their offices. It is up to the accountant to stress this key factor to the client.

delayed gratification

Delayed Results

As the accountant introducing this new accounting concept, you must show them value and render your professional expertise. Acceptance may be delayed, however, at each meeting between you and your client, revert back to earlier conversations about cloud accounting. When they’re tired of the tedious duties, extra costs and confusion, they will come around.

On the topic of cloud technology, data security in your business this tax season is important to consider. Make sure when you file 1099 online or W-2 and other tax forms, ask your provider how they ensure your client data is secure.

For 4 years, I’ve used the most trusted provider to efile 1099 forms for my clients. The service is eFile4Biz.com. They’re unlike any others I found while asking around my peer groups.

Selfishly, I like the fact that after I file tax forms for my client, they do the printing and delivery of the forms to their employees. I no longer have the burden of doing all that time-consuming work. What a weight off my shoulders, leaving me time to handle clients. You should check them out.

If you have ideas on this topic to share, please visit our App.Net page here and leave your comments or suggest some useful links to explore on this topic.